If you’re preparing to buy your first home, you’ve likely come across the terms “closing costs” and “prepaid items.” And while they both affect the amount of money you’ll need at the closing table, they aren’t the same thing.
Understanding the difference between prepaid items and closing costs is essential to feeling confident and financially prepared on your homeownership journey.
Let’s break it all down, so you know exactly what to expect—and what you’ll actually pay—when you close on your new home.
Get started on your homebuying journey with GO Mortgage.What are closing costs?
Closing costs are the fees you pay for services that make your home purchase possible.
These are tied directly to the transaction and often vary based on location, loan type, and the professionals involved.
Here’s what typically makes up your closing costs:
- Lender fees: Loan origination, underwriting, and processing
- Appraisal fee: Covers the valuation of your property
- Title services: Title search, title insurance, and document prep
- Recording fees: Paid to your county or local government to record the property transfer
- Credit report fee: A credit report fee is applied by the lender to cover the cost of accessing your credit history.
Closing costs typically range between 2% and 5% of the home’s purchase price. For a $300,000 home, the cost could range between $6,000 and $15,000. These costs are paid upfront at closing and are in addition to your down payment.
Sometimes, your lender or seller may agree to cover a portion of the closing costs. But unless negotiated otherwise, they’re generally your responsibility as the buyer.
What are prepaid items in a mortgage?
Prepaid items are costs you’ll need to pay in advance as part of your mortgage agreement.
Unlike closing costs, which are one-time payments for services rendered, prepaid items are ongoing expenses paid upfront.
They typically include:
- Homeowners insurance premiums
- Property taxes
- Mortgage interest (from closing day to month’s end)
- Escrow deposits (for taxes and insurance)
These prepaid amounts go into your escrow account, which your lender uses to pay future bills on your behalf.
This helps ensure you stay current on taxes and insurance, protecting both your home and your lender’s investment.
Why are prepaid items necessary?
Although they may seem like extra costs, prepaid items are simply early payments for recurring expenses. Whether you buy a home or not, property taxes and homeowners’ insurance are inevitable, so think of these as upfront budgeting for the future.
How are prepaid items and closing costs different?
While they’re both paid at closing, prepaid items and closing costs serve very different purposes:
| Feature | Closing Costs | Prepaid Items |
| Purpose | Cover fees for services used during the homebuying process | Pay for future expenses tied to homeownership |
| Examples | Loan origination, title services, appraisal, and government fees | Property taxes, insurance, daily interest, escrow funding |
| Variability | Depends on location, lender, and transaction terms | Depends on the tax rate, insurance provider, and closing date |
| Refundable? | Typically non-refundable | Some may be refundable if overpaid (e.g., escrow surplus) |
Understanding this distinction helps you budget more effectively and ask smarter questions during the mortgage process.
What is cash to close, and how is it calculated?
Cash to close is the total amount you’ll need to bring to the table on closing day. It includes your down payment, closing costs, and prepaid items, minus any credits or payments you’ve already made.
Here’s a simplified formula:
Cash to Close = Purchase Price + Closing Costs + Prepaid Items – Loan Amount – Earnest Money – Seller Credits
Example:
Let’s say you’re buying a $300,000 home with:
- 10% down ($30,000)
- $8,000 in closing costs
- $4,000 in prepaid items
- $5,000 earnest money already paid
- $2,000 in seller credits
Your cash to close would be:
$300,000 + $8,000 + $4,000 – $270,000 (loan amount) – $5,000 – $2,000 = $35,000
You’d need to bring $35,000 to closing via wire transfer or cashier’s check made out to your escrow company.
Want a clearer breakdown of what to expect on closing day? Connect with the GO Mortgage team to run your numbers confidently.
How can you prepare for out-of-pocket costs at closing?
Knowing these categories in advance makes the financial side of homebuying less overwhelming.
Here are a few ways to prepare:
- Ask for a Loan Estimate early: This standardized document gives you a preview of your estimated closing costs and prepaid items.
- Compare insurance quotes: Choose a homeowners insurance policy that fits your budget and coverage needs.
- Confirm your closing date: Your prepaid interest amount is affected by your exact closing date. The later in the month you close, the less interest you’ll prepay.
- Budget extra: Even with a solid estimate, costs can fluctuate. Set aside an extra $1,000–$2,000 for peace of mind.
Check out our mortgage glossary for definitions of key terms, or use our homebuyer checklist to stay on track throughout the process.
Helpful resources
- Buying and selling a home
- The need for preapproval
- What to understand about property lines
- CFPB: What are closing costs?
Final thoughts: Clarity is power in the homebuying process
The more you understand what makes up your total cash to close, the more empowered and prepared you’ll feel.
Knowing the difference between prepaid items and closing costs ensures you aren’t surprised by the final numbers—and gives you a better chance of sticking to your budget.
At GO Mortgage, we’re here to guide you through each step, from preapproval to closing day. We believe in transparency, education, and empowering you to take control of your financial future.Ready to buy your first home? Let’s walk you through every cost, step by step. Start your homeownership journey today.